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Spending What We Don’t Have

By Floyd Norris August 31, 2006 1:05 pmAugust 31, 2006 1:05 pm

The July personal income numbers out today indicate that once again Americans had personal consumption expenditures that were greater than their disposable income. That has been true now for 16 consecutive months, after being true only once before that, in October 2001.

Those are the negative savings rates that people talk about.

Coming up with dollar figures requires a little effort, because the numbers come out monthly at seasonally adjusted annual rates. But I estimate that the negative savings came to about $78 billion over that period.

As it happens, on Wednesday the government provided estimates of personal consumption expenditures for the second quarter. It looks as if spendng on gas and other vehicle fuels was up around $87 billion for the 15 months through June, compared with the previous 15 months.

That does not explain the entire negative savings rate, but it looks as if Americans as a group may have responded to higher gasoline prices by simply borrowing the money, perhaps on the theory that the increases were temporary. Personal consumption expenditures for things other than energy goods and services are up 5.7 percent year over year, hardly a sign of cutting back.

The oil futures markets, which a couple of years ago agreed the increases were temporary and would come down sharply within a year, are now forecasting that oil prices will go up for the next year, and then come down slowly, so that they are more or less at current levels at the end of 2010.

The futures market has been wrong before, but if individuals come to agree with it, it would be reasonable for them to cut back on other spending as they pay more for gasoline.

On the other hand, perhaps Main Street is simply following Pennsylvania Avenue. The government still treats spending on Iraq and Afghanistan as temporary expenditures that should not affect what is spent on other priorities.

A lot of handwringing and handwriting is produced about the negative personal savings rate. However virtually nothing is written about the fact that expenditure data is easy to collect while total income data is not. In other words, the reported savings rate figures have a downward bias. It is likely that after the handwringing is over and journalists have moved on to solve other pressing problems the rest of us face, the government statisticians will determine that the personal savings rate over the recent period was in fact positive.

The real problem for the US is not the personal savings rate, which may or may not be negative, but rather the national current accounts. No one can argue that the US current account is anying other than massively negative. Private households, private enterprise and government are all collectively to blame and no one seems willing to make any adjustments to correct this situation.

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